HouseHack or Invest Out of State

[Amir Ainsworth]

Hello BP Community,

I am currently deciding whether I should HouseHack in Southern California, which as we all know is a very expensive market or invest out of state in the Cleveland Ohio area. What are the pros/cons that you guys can think of in choosing either option? I have thought out some below.

HouseHack in California
Pros: 

1. Possibly live rent free or at a reduced rent amount. 

2. Can use an owner-occupied loan to purchase the house.

3. Easier to self-manage and get my feet wet in REI.

4. Can save money on renovation cost if needed by doing the work myself.

Cons:

1. Very expensive market that is hard to find cash flow.

2. Will put a bigger strain on my financial position if something goes wrong or can't find tenants right away. Much more expensive mortgage payment.

3. Low or negative COC return

Invest Out of State (Cleveland)

Pros:

1. Likely to find properties that cash flow significantly.

2. Much easier to cover the mortage if something goes wrong.

3. Will force me to expand my REI capabilities by creating systems.

4. COC return will be much higher.

Cons:

1. Will still have to pay for rent in California

2. Will not qualify for owner-occupied financing

3. Will not get as much appreciation as in California.

Note: My main goal is cash flow right now as I am young and want the CF for financial independence. Both routes will help me get there quicker. If I am house hacking, I will have a low rent payment or none at all and if I am investing out of state, I will get cash flow from the units. Right now, I have about 34K for a downpayment + closing cost and $6,500 in my emergency fund for reserves if needed. I am looking to buy small multifamily properties in both markets (2-4) units. 

[Jon Schwartz]

@Amir Ainsworth, I'd recommend you start by house hacking in La Verne.

Two questions:

What are you paying in rent right now? And do you have income from a day job?

If you're currently paying a lot in rent and you have income from a day job, I would definitely house hack. The big benefits is house hacking in Socal are that you're able to significant reduce your cost of living while capturing the appreciation gains on a large asset. Over the next five years, the appreciation gains you'll make in Socal will significantly outpace the cashflow you'd experience from a Cleveland property.

Also, you really need an owner-occupant loan to get into a decent property. An investor loan will require 25% down, and with only $34K, you're looking at $125K or so max for an out-of-state property. You can certainly find duplexes in Cleveland for that price, but you'll be buying in a terrible neighborhood. Your cashflow will be eaten up by turnover and maintenance.

As an owner-occupant in La Verne, you can put, say, 5% down on a duplex, easily getting you to a $650K purchase price. Actually, you'd probably do better by putting 5% down on a house with an ADU in the back, living in the ADU, and renting the house. You'd maximize your rental income that way.

Anyway, if you have a day job, don't sweat cashflow right now. Spending a few years building equity is just as valuable as spending a few years building cashflow.

Best,

Jon